Transactions Blog

A new Tax Act Implementing the EU Tax Merger Directive into Belgian law was published in the Belgian Official Gazette on the 12th January and came into force immediately.

The act introduces a tax-free regime for cross-border reorganisations. In addition, it also brings the existing tax provisions applicable to internal reorganizations in line with the EU Merger Directive.  Most provisions are applicable as of the date of publication.

The EU Merger Directive of July 23, 1990 (as amended by the EU Directive of February 17, 2005) provides for a tax-neutral regime for cross-border reorganizations such as mergers, demergers, partial demergers, share-for-share transactions, contributions of assets and transfers of registered offices. Tax neutrality is provided both at the level of the companies involved in the reorganisation as well as in the hand of their shareholders.

Until now the EU Tax Merger Directive was not implemented in Belgian tax law, meaning that cross-border reorganisations were not covered by appropriate tax legislation. This situation is now resolved with the publication of the new Act.

The Act provides for a tax-neutral regime for cross-border reorganisations involving Belgian entities and/or Belgian permanent establishments. Moreover, various existing tax provisions applicable to internal reorganisations have also been aligned with the EU Tax Merger Directive. Other improvements have also been implemented to the existing general tax provisions relating to reorganisations.

Under specific conditions, Belgian tax resident entities and/or Belgian permanent establishments can now be involved in pan-European tax neutral reorganizations, where previously, for most cross-border reorganisations, tax-neutral regimes were not available.

The Act deals in particular with cross-border (inbound / outbound) mergers, demergers and cross-border (inbound / outbound) contribution of assets (lines of business / permanent establishment) and exchange of shares.

Because of the importance of this new legislation, the PwC Transactions team is organising a half-day conference in our office in the afternoon of 3 February 2009. PwC will give a thorough update on the changes that will be introduced by this new legislation and the opportunities it will bring for your business.

During this session, it will be explained how you will be able to carry out cross-border reorganisations tax-neutrally (whether in the form of a merger, demerger, contribution of a business, transfer of a seat of management, share-for-share deal, etc.). Among other innovations, it will allow you to utilise cross-border tax losses or simplify your group structure by reducing the number of entities in it, which will even become more and more important given the current market environment. It goes without saying that such reorganisations also have important social law aspects. PwC will also address these issues during the conference.

In addition, we take this opportunity to discuss the recent corporate law developments (regarding a.o. acquisitions of own shares, financial assistance and cross border mergers) and their impact on reorganisations.

Check the PwC M&A Academy website for more information.

While fair value is the standard valuation basis for the measurement of assets and liabilities in the preparation of balance sheet following an acquisition, the new IFRS 3 (IFRS 3 revised or IFRS 3R) requests an even wider use of the notion of fair value. Moreover, IFRS 3R requires the amount of goodwill to be fixed at the date at which the control is obtained.

Consequently, a change in fair value subsequent to the acquisition date will not result in an adjustment to goodwill as with the current version of IFRS 3, even in a buyout context (subject to a 12-month period allowed for finalising the business combination accounting).

Another impact of IFRS 3R will be the rise in number and complexity of valuations to be performed when acquiring new businesses. Indeed, the fair value measurement has been expanded to include contingent considerations (e.g. earn-out clauses), whether probable at the acquisition date or not. The fair value measurement has also been expanded to include re-assessment and potential reclassification of some financial instruments.

A third consequence is a potential greater volatility of the results as adjustments (subsequent to the acquisition balance sheet date) to the identified assets and liabilities values (and goodwill) will directly impact the income statement.

Another change is that transaction costs will not be part of the purchase price anymore. Transaction costs will have to be expensed and gains related to previously held interests (step acquisitions) will have to be recognised in the profit or loss (these gains were previously recognised as a revaluation surplus in equity).

As a result, the wider use of fair value will increase the incentive for more accurate and reliable value assessments.

Such accurate and reliable value assessment can usually be achieved through detailed analyses of historical and projected financial statements. These analyses provide an insight into the determinants of the intangibles to be recognised and contribute to more reliable measurement.

Both market factors (e.g. market surveys, sector benchmarking reports) and company specific factors should be studied during this process. The application of specific and sometimes sophisticated valuation methods (Multi-period excess earning method, relief from royalty method to name a few) which include models to assess the probability of performance objectives being achieved may also increase accuracy.

The best way to avoid (bad) surprises (especially in the current market conditions where, for example, debt covenants play a crucial role) is to anticipate the consequences of the proposed transaction terms in the framework of the new accounting standard at an early stage (i.e. prior transaction date, during negotiations) and to model potential scenarios.

Cross-border mergers are now regulated in Belgium further to the adoption by the Chamber of the Miscellaneous Provisions Act (the “Act”), which is aimed inter alia at implementing Directive 2005/56/EC on cross-border mergers of limited liability companies (the “Cross-border Directive”) into Belgian law. The Act entered into force on 26 June 2008.

Old Rules

Before the Act came into force, cross-border mergers were not organised under Belgian law. Legal writers were divided on the feasibility of cross-border mergers notwithstanding adoption of the Belgian Private International Law Code in 2004, which stipulates that mergers of legal entities are governed, for each of them, by the law of the State to which they belong before the merger. In a 13 December 2005 judgment known as the “Sevic judgment”, the European Court of Justice had also confirmed the principle of the freedom of movement and establishment of companies, allowing cross-border mergers[1], but the effects of such a merger remained uncertain under Belgian law.

Scope of the New Act

The Act introduces a new chapter V bis into the Belgian Companies Code, dealing with cross-border mergers and assimilated operations. The laws governing the tax consequences of cross borders mergers are currently in process.

Companies Entitled to Merge

The Belgian cross-border merger procedure applies to all legal entities that can merge at Belgian level, while the directive concerns only limited liability companies. The scope of the Act is therefore wider than that of the Cross-border Directive. A limited partnership (“société en commandite simple”), for example, can therefore validly merge with a foreign company if the latter’s national law allows so.

Public investment companies with variable capital and companies in liquidation are expressly excluded from the scope of the cross borders merger regulation.

Permitted Operations

In accordance with the terms of the Cross-border Directive, the Act only deals with three forms of merger: (i) merger by absorption, (ii) merger by incorporation of a new company and (iii) merger by absorption of a wholly owned subsidiary (this being defined as an assimilated operation). The Act does not regulate (i) (partial) demergers, (ii) contributions of a line of business or (iii) contributions by way of universal transfer.

Belgium has used the opportunity provided by the Cross-border Directive to allow remuneration in cash exceeding 10% of the par value. Cross-border companies can validly merge notwithstanding a cash consideration exceeding one tenth of the par value of the shares allotted by the company resulting from the cross-border merger or, in the absence of a par value, of the fractional value, provided the legislation applying to at least one of the foreign companies allows so.

I will address in a next posting the formalitites that need to be fulfilled …